Companies and tax

Isn't tax avoidance a problem for the government?

Yes, it is. Governments create tax laws and have the job of tackling tax avoidance, which they have done with varying degrees of success over the years. However, there are three points to make.

Firstly, if we could not identify tax avoidance and draw attention to it government could not take action to stop it, so looking at the behaviour if taxpayers is vital if tax losses are to be stopped.

Secondly, a great deal of tax avoidance is done internationally and since there is no international government we have to look at individual companies to assess the scale of this issue.

Lastly, there is nothing that obliges a company to avoid tax. It is most definitely not a legal duty of a UK company that it must minimise its tax bill however it can. As such whilst tax avoidance is a problem for governments it is a choice by companies. Therefore the public is more than justified in trying to hold them accountable.

If we tax companies more, won’t they just leave the country?

There are three reasons why this argument does not hold true.

The first is that the UK is a very big market for any company and few, if any, would give up the chance to make profits here even if they had to pay more tax on those profits. Google have, for example, said that: if they don’t pay tax it is only because the rules allow that outcome. They have said if the rules were different they would pay and that any rational company would do the same, as there would still be money to be made in the UK.

Secondly, this argument has been made over many years and despite all the bluster very few companies have ever left the UK, whilst others have also arrived. The ransom note that these threats represent seem to be very rarely delivered. Therefore it is possible to ignore them.

Lastly, because of recent changes to UK corporation tax, UK companies only pay tax on the profits they make in the UK and nothing else. As a result there is no incentive for a head office company to leave the UK if it does not trade here as they’re now unlikely to have a UK tax bill in that case. There is also no incentive for a company trading here to leave as they’ll remain taxable on the trading profits they make if they leave if they still trade in the UK. The result is that this is now an empty and meaningless threat.

Don’t companies have a duty to increase value for their shareholders?

This is a bit of an urban myth. Companies have no legal duty whatsoever to maximise their profits in the UK. A company’s directors have a legal duty to promote the success of their company but that duty is both widely defined and subject to considerable constraints, as the law shows. This is the law in question, from the Companies Act 2006:

172: Duty to promote the success of the company

(1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a)the likely consequences of any decision in the long term,

(b)the interests of the company’s employees,

(c)the need to foster the company’s business relationships with suppliers, customers and others,

(d)the impact of the company’s operations on the community and the environment,

(e)the desirability of the company maintaining a reputation for high standards of business conduct, and

(f)the need to act fairly as between members of the company.

(2)Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

(3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

As is clear, profit maximisation is not referred to. It is true that the ‘success of the company for the benefit of its members’ clearly implies a duty to generate profit, or at least a positive cash flow, but that is not the same as maximising profit. In any case, the duty to the members is constrained, as is clear from sub-paragraphs a to f.

In that case what the law very clearly says is that judgement has to be exercised. Tax avoidance may not in that case be sound judgement. It may well be harmful to employees. It may be harmful to the members, who may have to pay more tax as a result in a personal capacity. And it may harm the long-term interests of the company by creating a risk of a challenge from tax authorities.

In that case it is clear that in UK law there is:

  • No duty to maximise profit
  • No duty to minimise tax bills
  • A clear duty to exercise judgement

And we do not believe that tax abuse can be reconciled with the legal obligation of the directors because it is clearly contrary to the interests of pension fund members, employees, the long term stability of the company and as such to its duty to suppliers, customers and others.

Don’t companies contribute other forms of tax?

Companies do pay many taxes to government. In some cases, like the PAYE and national insurance they collect from staff and the VAT they collect from customers, the company simply acts as an unpaid tax collector for H M Revenue & Customs. That’s true of all sorts of national insurance by the way – even the part called ‘employer’s national insurance’ because all economists agree that this is really paid by employees who have lower wages as a result.

Other taxes, like business rates, landfill taxes, airport duties and so on, are really payments for services provided and so are really business expenses, not taxes. That is how they are treated in the accounts.

In fact it is just corporation tax that has to be disclosed separately in a set of accounts and has to be analysed and that is because for a very long time (indeed, until very recently) it was widely agreed that this was the one tax that the company really paid. For that reason it is also the only one we can analyse any data on, as payment details on all other taxes are not made available in any set of accounts.

Whilst we do not dispute companies pay over other taxes, we do not think that they are taxes on their profit or we think they are paid on other people’s behalf. Corporation tax is unique in being a tax on the company and is also unique in having information disclosed on the sums due. That is why we give it sole attention here.

What do you mean by fair?

‘Fair’ is a subjective term open to a range of interpretations. However, we believe that there is a way to understand what is and is not ‘fair’ when it comes to corporation tax. For us, ‘fair tax’ means a business seeks to pay the right amount of tax in the right place at the right time. This means if a profit is really made in the UK it should be taxed here too, at the time it was earned, and not shifted to another country to be taxed there at a lower rate or indeed, not at all. We think this will help us have a fairer system overall, essential for a vibrant mixed economy that works for the benefit of us all. It’s about acting in accordance with the spirit of the law, rather than quibbling over wording to try to get away with dodgy dealings.

Why does transparency matter?

Being transparent on tax helps companies to communicate what they’re doing to consumers, clients, investors and the general public. Tax is an issue which affects us all, so we believe companies have a duty to be open about what they’re doing on it. Transparency is the best way to prevent manipulation of accounts in order to avoid or evade taxes. It enables other stakeholders, like the public, journalists, non-governmental organisations or consumers to see what a company is paying. It’s also vital for developing world tax authorities: developing countries suffer the most from the impacts of tax avoidance. They often need information about companies based in other countries in order to see where their rightful money is flowing to, but this information is hard to get if there is little transparency.

Use of the Mark: Terms and Conditions

How much does the Fair Tax Mark cost?

Licensing fees are banded according to a company’s turnover. Half the fee is paid in advance and covers the cost of an assessment. The second half of the fee then purchases the licence to use the Mark for a period of one year.

See our full price list here.

Can I renew the use of the Fair Tax Mark after a year?

Yes; you’ll need to disclose all the information as per the first year of signing up, though some of it may need very little refreshing, such as your tax policy. We’ll support you through the process.

What happens if the ownership of my company changes during the year covered by the licence agreement. Will this affect the Fair Tax Mark?

It may do. There is an obligation within the terms of the agreement to inform us of any changes. Drop us a line and we’ll figure it out together.

Is there a risk of you changing the Fair Tax Mark criteria so we suddenly lose our eligibility?

We don’t envisage updating our scoring criteria until 2018 at the earliest. When we do begin an updating process, our companies will be consulted and given a 12 month courtesy period to implement any changes needed to ensure they can maintain their Mark.

My company passed the assessment and I’d like to buy a Mark but I’m not planning on re-designing my marketing materials for another six months. Can I delay when I actually sign up for the scheme?

Yes. You can choose to start using the scheme whenever you like, providing that in the interim nothing has changed to either your company ownership or you have not released a new set of accounts. If anything has changed Fair Tax Mark will undertake to re-rate your company to ensure that it still meets our criteria.

What are the guidelines for using the Fair Tax Mark?

They are contained within the licensing agreement.

Can I use the FTM in another country given it's been designed for the UK?

Currently the Fair Tax Mark is focused on UK companies but it has always been our intention to extend it for use in other countries. This requires further development of the methodology. If you can support this development financially, please feel free to get in touch to see how we might work together.

If we haven’t answered your question in the FAQs above please get in touch.

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